Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Time to Hit the Stage?

The overlooked retailer may be a value-priced turnaround opportunity.

It's a little hard to believe that there might actually be much value left in retailing these days. Clothiers such as bebestores(NASDAQ:BEBE) and Abercrombie & Fitch(NYSE:ANF) have been red-hot, and even Target(NYSE:TGT) has beaten the broader market by double digits. With concerns about the health of the U.S. economy and the high level of consumer debt, a lot of wags are wagging their tongues about an oncoming decline in the retailing sector.

Eh, whatever.

If small-town retailer Stage Stores(NASDAQ:STGS) can stay on track, it may just prove to be a bargain after all.

What Stage does isn't especially unique -- it sells a broad line of apparel and related goods through stores such as Stage, Bealls, and Peebles -- but where it does it is a little different. Stage has realized that even people who live in smaller communities like to wear (and purchase) clothing.

While many retailers totally ignore communities with populations below 150,000, that's Stage's bread and butter. Roughly 80% of the company's stores are located in cities with fewer than 150,000 residents, and roughly 60% of the stores are located in towns smaller than 50,000 people.

Sales for the fourth quarter climbed about 5.5% at Stage, with same-store sales up about 4% across the business. While this performance is admittedly skewed by the inclusion of Peebles (which was acquired in November of 2003), the company's same-store sales growth of 3.7% for February suggests business is still on track.

That's not to say that this company isn't without its warts. Net income was down for both the fourth quarter and the full year, in part because of higher inventory shrinkage and various other costs. What's more, the midpoint of the company's guidance for 2005 was 10% lower than the previous Wall Street guess (though some one-time items included in the guidance do soften the blow a bit. ).

What is to like, though, is the fact that the company is cash-flow positive and debt-free and has a good recent track record of buying back stock. Additionally, suppliers that once turned up their nose at having their goods sold in Stage's stores are now more accommodating, and Stage is seeing the benefits in increased floor traffic.

Valuation still appears reasonable at Stage, despite the stock having more than doubled over the past two years. The trailing P/E is only about 14, and the company's EV-to-FCF ratio (excluding proceeds from a one-time sale) is similarly below 15.

What should Fools do (aside from their own due diligence)? While the valuations look low, I'd wait to see some better growth before jumping in and making a purchase. Stage certainly has the potential to improve margins and sales across its stores, but I personally would want a little more upside from a stock that is always in danger of being Wal-Mart-ed (NYSE:WMT).